Amerant Bancorp Inc. (NYSE:AMTB) Q4 2023 Earnings Call Transcript January 25, 2024 9:00 AM ET

Company Participants

Laura Rossi - Head of Investor Relations and Sustainability

Jerry Plush - Chairman and Chief Executive Officer

Sharymar Calderon - Executive Vice President and Chief Financial Officer

Conference Call Participants

Michael Rose - Raymond James

Feddie Strickland - Janney Montgomery Scott

Russell Gunther - Stephens

Will Jones - KBW

Stephen Scouten - Piper Sandler

Operator

Greetings. Welcome to the Amerant Bancorp Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Laura Rossi, Head of Investor Relations and Sustainability. Thank you. You may begin.

Laura Rossi

Thank you, Darryl. Good morning, everyone and thank you for joining us to review Amerant Bancorp's fourth quarter and full year 2023 results. On today's call are Jerry Plush, our Chairman and Chief Executive Officer, and Sharymar Calderon, our Executive Vice President and Chief Financial Officer.

As we begin, please note that discussions on today's call contain forward-looking statements within the meaning of the Securities Exchange Act. In addition, references will also be made to non-GAAP financial measures. Please refer to the company's earnings release for a statement regarding forward-looking statements as well as for information and reconciliation of non-GAAP financial measures to GAAP measures.

I will now turn it over to our Chairman and CEO, Jerry Plush.

Jerry Plush

Thank you, Laura. Good morning everyone and thank you for joining today's call. Today, we will cover our performance for the fourth quarter and full year. But, before we do this, I would like to acknowledge and thank all of my Amerant colleagues for their dedication and effort this quarter as we completed our conversion to new core systems. This project, which required a significant amount of planning and effort was a huge undertaking and the team was up to the challenge. Please note that work continues in a number of areas post conversion as more enhancements are on the way.

So moving on to what we will cover on today's call. There are clearly a significant number of items to touch on, including the commercial real estate sale and a number of additional actions we took this quarter to best position our company for 2024 given an expected decline in interest rates. For reference, we filed a Form 8-K covering these on January 16, 2024, but it's important to give some additional context on today's call, which we will do. While these actions created additional non-routine gains or charges this quarter, we expect this to be behind us for 2024 and as I mentioned, best position us to execute on our growth strategy. I also want to note here that we will cover credit in detail and we've added a number of new slides to the presentation, with more detail on credit components which Sherry will be covering shortly.

So we'll turn now to cover Slide 3, and here we've outlined a number of key items that took place in the fourth quarter. First, deposits grew by $326 million, reflective of our deposits first organic relationship-based approach, while total loans grew $132 million. As previously reported, we made the decision to reclassify $401 million of Houston based multifamily loans as held for sale and we recorded a non-cash charge of $30 million before taxes in the fourth quarter. This sale is expected to be completed sometime this month. As $370 million of these loans are variable-rate and at an average yield of 6.7%, this sale protects the Company in a projected declining rate environment. Also, this strategic asset liability move, together with our projected increase in earning assets, is expected to create a net positive on margin after the first quarter, as we plan to use the proceeds of the transaction to reduce higher-costing non-relationship institutional deposits at an average cost of 5.6%. Finally, this repositioning also reduces CRE exposure. It's important to note that this sale also rightsizes our operations in Houston where loans prior to the sale exceeded deposits.

So we'll turn now to New York, and here we reduced higher-risk assets as we completed the sale of the highest New York City CRE exposure and we exited the nonperforming loan relationship in New York City we discussed on our third quarter call. And it's all part of our strategy to exit the remaining New York City loan portfolio. Speaking of the portfolio, what remains is performing and totals $217 million and consists of 21 properties in 12 relationships. We do have one small credit, which is under $2.5 million that is being watched. We repaid $585 million in Federal Home Loan Bank advances recording a $6.5 million gain for the early repayment, and the replacement funding provides for a lower cost of funds going forward. We rationalized certain organizational components, such as acquiring the remaining ownership interest in Amerant Mortgage and rightsized staffing given the current rate environment and we approved the plan for the dissolution of the Elant Bank & Trust, our Cayman subsidiary. We wrote off goodwill from $1 million related to the mortgage company and $700,000 in goodwill intangibles related to Elant, with expected annualized savings of $300,000 from closing Elant.

We also rationalized headcount across multiple units, resulting in expected annual savings of $1 million after having recruited severance expenses of $1 million. And as noted, we completed the core system conversion and we're actively managing post conversion items. We recorded $1.6 million in final conversion costs related to FIS and software expenses in the fourth quarter of '23. We also restructured bank owned life insurance to include more current team members in the plan and to provide for an enhanced yield going forward with an earn back period of approximately two years. This resulted in income tax expenses and other charges totaling $4.6 million.

I'll now provide a brief overview of our financial position in the fourth quarter and year, and then, turn it to Sherry to go over the details. She’ll then turn it back to me for some comments regarding 2024 as part of my closing remarks.

So let's turn to Slide 4 now for financial highlights for the fourth quarter. Looking at the income statement, diluted loss per share for the fourth quarter was $0.51. This is primarily due to the net impact of those non-routine items we recorded during the period that I just covered. The net interest margin increased to 3.72% from 3.57% in the third quarter, which includes interest collected along with a loan principal recovery which Sherry will go into further detail in a few minutes. Exclusive of this recovery, we would have been relatively even with the third quarter, although we like others continue to experience the challenges of a sustained high interest rate environment along with market competition. And as a result of higher cost of funds, this quarter, we reached an inflection point in margin compression. Credit quality events continue to be an area of focus and reserve levels are carefully monitored to provide sufficient coverage. Our provision for credit losses was $12.5 million, up $4.5 million from the $8 million in the third quarter and again as I mentioned, Sherry will be covering the credit components in detail shortly.

Noninterest income was $19.6 million, down from $21.9 million in the third quarter while noninterest expense was $109.7 million, up $45.3 million from the third quarter. Both noninterest income and noninterest expense contained non-routine items this quarter that I've already commented on. Total assets reached a record high of $9.7 billion, up from $9.3 billion as of the close of the third quarter. Total deposits also increased to $7.9 billion compared to $7.5 billion in the third quarter. While total loans increased $132 million, gross loans held for investments actually decreased to $6.9 billion from the $7.1 billion in 3Q. Our total securities portfolio was $1.5 billion and that's up $183 million from the third quarter while cash and cash equivalents increased $12 million to $321 million at the end of the fourth quarter. The additional securities purchase were fixed rate and they were all part of our ALM actions given an expected decline in rates in 2024.

And moving on now to capital. Our total capital ratio as of 4Q ended at 12.19% compared to 12.7% as of 3Q and our CET1 was 9.84% compared to 10.3%. Our tangible equity ratio was 7.33%, which includes $70.8 million in AOCI resulting from the after-tax change in the valuation of our AFS investment portfolio, which substantially improved in the fourth quarter from $97 million that we saw in the third quarter of ‘23. Lastly, as of fourth quarter, our Tier 1 capital ratio was 10.6% compared to 11.08% as of 3Q and it's also worthy to note that on January 17, our Board of Directors approved a dividend of $0.09 per share payable on February 29, 2024.

So, we'll move now to Slide 5. And I'll provide an overview regarding our deposit base. As I mentioned earlier, total deposits at the end of the fourth quarter were $7.9 billion, up $326 million from the third quarter. This increase was mainly driven by an increase in relationship deposits of $365 million while institutional deposits declined by $40 million. Speaking of institutional deposits, as I briefly mentioned earlier, we anticipate the balance of this higher cost non-relationship source of funds to be runoff by mid first quarter 2024. Our ratio of loans to deposits increased -- decreased this quarter to 92.4%. As we have referenced in prior calls, our goal is to manage it to a target of 95% and not to exceed 100%. We have a strong loan pipeline in the first quarter, so we expect to be back in this range soon.

We'll turn now to Slide 6 and here we show a well diversified deposit mix composed of domestic and international customers. Our domestic deposits account for 69% of total deposits totaling $5.4 billion as at the end of the fourth quarter, that's up $340 million or 6.7% compared to the third quarter and international deposits, which now account for 31% of total deposits, totaled $2.5 billion, down slightly 0.6% compared to the third quarter. Domestic deposit accounts have an average balance of $110,000 while international deposit accounts have an average balance of $43,000 and that reflects the granularity of our deposit base and the stability of this funding source. As I've shared in previous calls, we intend to take advantage of our infrastructure and capabilities, and begin to further emphasize international deposit gathering going forward as a source of funds given favorable pricing while continuing to add diversification to our funding base.

Our core deposits, defined as total deposits excluding all-time -- total deposits excluding all time deposits -- excuse me -- were $5.6 billion as at the end of the fourth quarter, an increase of $332 million or 6.3% compared to the third quarter. Included in core deposits are $1.4 billion in noninterest-bearing demand, up $35 million or 2.5% versus third quarter, $2.6 billion in interest bearing deposits, up $144 million or 6% versus the third quarter, and that's primarily the result of continued customer demand for higher rate products, and $1.6 million in savings and money market deposits, up $153 million or 10.5% versus the third quarter.

So at this point, I'm going to turn things over to Sherry. She’ll go over key metrics, some other balance sheet items, credit quality and the results in the third quarter in more detail.

Sharymar Calderon

Thank you, Jerry, and good morning, everyone. As part of today's presentation, I will share more color on our financial position and performance. Turning to Slide 7, I'll begin by discussing our key metrics for the quarter. Noninterest-bearing deposits to total deposits decreased to 17.8% from 18.2%. Despite the challenges of customers seeking higher interest rate and the market competition, we continue to work hard on our deposits first focus and increasing demand deposit accounts by building relationships in our markets. While the ratio slightly decreased, total noninterest-bearing balances in fact increased, although not at the same speed as interest-bearing deposits.

Net interest margin improved to 3.72% compared to 3.57% in the third quarter. This includes 16 basis points in connection with a one-time loan recovery. We will cover details of NIM changes quarter-over-quarter shortly. Our efficiency ratio was 108.3% compared to 64.1% in the third quarter as a result of the $43 million in non-routine noninterest expense items Jerry just covered. ROA and ROE in the fourth quarter were a negative 0.71% and negative 9.22% respectively, as a result of the one-time charges and higher provision for credit losses during the period. For consistency and transparency, we showed the three core metrics of ROA, ROE, and operating efficiency excluding non-routine items, so you can better see our underlying performance for the fourth quarter. As an example, core efficiency for the fourth quarter was 69.7% compared to 62.1% in the third quarter, which excludes non-routine charges. As I mentioned last quarter, these results also include certain costs of new applications and services being used in parallel after the conversion with previous applications in place. This parallel use of applications will occur until we complete commission applications in the first quarter of 2024, and therefore reduce these costs.

Moving onto Slide 8, I'll discuss our investment portfolio. Our fourth quarter fixed income investment balance was $1.4 billion, slightly up from both the third quarter and the same period from last year. When compared to the prior quarter, the duration of the investment portfolio decreased to five years due to market rates decreasing during the quarter. We added a new chart to show the expected repayments and maturities of our investment portfolio for 2024, which represents the liquidity available to support growth in higher interest-earning assets.

Moving on to the rate composition of our portfolio, you can see that the floating portion decreased to 13% compared to 15% in the third quarter. This reflects our efforts to position the balance sheet for a decreasing rate environment and achieve the right balance between yield and duration, while maintaining the high credit quality of the portfolio. As we have done in previous quarters, I would like to reference the impact of the interest rates on the valuation of debt securities available for sale. As of the end of the fourth quarter, the market value of this portfolio had improved $35 million after-tax compared to the decrease of $19 million in the third quarter. The quarter-over-quarter improvement was primarily driven by market rate moves and it's consistent with our interest rate sensitivity analysis for down 100 basis point shock. We had an increase of $9.4 million after-tax for the full year of 2023. It is also important to comment that our tangible common equity ratio ended at a solid 7.3% after considering the impact of changes in valuation of our AFS portfolio. Note that 82% of the total portfolio has government guarantee, while the remainder is rated investment grade.

Continuing on to Slide 9, let's talk about our loan portfolio. At the end of the fourth quarter, total gross loans were $7.3 billion, up 1.9% compared to the end of the third quarter. The increases were primarily driven by increases in single-family residential loans, land development, commercial loans as well as construction loans. Consumer loans as of the end of 4Q ‘23 were $403 million, a decrease of $36 million or 8.2% quarter-over-quarter. This includes $211 million in higher-yielding indirect consumer loans compared to $255 million in the third quarter, which were a tactical move for us to increase yields in prior periods. As we mentioned last quarter, we are focusing on organic growth and have not been purchasing any new production since the end of 2022. We estimate that at current prepayment speeds, this portfolio will run off by the first quarter of 2026. As Jerry mentioned, during the fourth quarter, we completed the sale of the high CRE exposure and exited the nonperforming loan relationships both in New York as part of the company's strategy to exit its remaining New York City loan portfolio.

The CRE loan sale resulted in a loss on sale of approximately $2 million in 4Q23 and the nonperforming loan was modified and paid off. Our loan portfolio had a yield of 7.09% in 4Q ‘23. This includes the loan recovery recorded during the period. To provide a more comparable figure, the yield of the loan portfolio excluding this recovery was 6.93%.

Moving onto Slide 10, here we show our CRE portfolio in further detail. We have a conservative weighted average loan to value of 58% and debt service coverage of 1.3 times as well as a strong sponsorship peer profile based on a AUM, net worth and years of experience for each sponsor. As of the end of the 4Q23, we have 31% of our CRE portfolio in top tier borrowers. We have no significant tenant concentration in our CRE retail loan portfolio, as the top 15 tenants represent 22% of the total. Major tenants include recognized national and regional grocery stores, pharmacies, food and clothing retailers and banks. Our underwriting methodology for CRE includes sensitivity analysis for multiple risk factors, like interest rates and their impact over debt service coverage ratio, vacancy and tenant retention.

As Jerry mentioned during the first quarter, we classified $401 million of our multi-family loans in Houston as held for sale. The transaction is expected to close later this month and had an impact to tangible common equity of a reduction of approximately 23 basis points on day one and to common equity Tier 1 of an improvement by approximately 12 basis points. With the process of the sale, we expect to reduce in 1Q ’24, higher cost non-relationship institutional funding of $260 million at an average rate of 5.6% and invest the remaining process in fixed rate -- fixed rate earning assets.

Now turning to Slide 11. Let's take a closer look at credit quality. Overall, credit quality remains sound and reserve coverage is strong despite charges recorded during the quarter. Non-performing assets totaled $54.6 million at the end of the fourth quarter of 2023, an increase of $1.2 million compared to the third quarter and an increase of $17 million compared to the fourth quarter of 2022. The increase in the fourth quarter was primarily due to [accrual of] (ph) two commercial Texas loans totaling $12.3 million with $4.1 million in allocated reserves and one commercial Florida loan totaling $7 million with $3.9 million allocated reserves. Often by the exit of the CRE year loans totaling $23.3 million with an associated charge-off of $10.3 million, of which $8.5 million wasn't specific reserve in previous quarters. The ratio of non-performing assets to total assets was 56 basis points, down 1 basis point from the third quarter of 2023 and up 15 basis points from the fourth quarter of 2022. Our non-performing loans to total loans are 47 basis points compared to 46 basis points in the third quarter. In the fourth quarter of 2023, the coverage ratio of loan loss reserves to non-performing loans closed at three times, consistent with three times at the end of the third quarter, an increase from two times at the close of the fourth quarter of 2022.

Now moving on to Slide 12, which is a new slide we added this quarter to better show the drivers of the allowance for credit losses. At the end of the fourth quarter, the allowance was $95.5 million, a decrease of $3.3 million or 3.3% compared to $98.8 million at the close of the third quarter. The drivers of the allowance movement this quarter were $20.6 million in charge-offs, out of which $12.1 million are incremental charges in the quarter and are primarily related to the indirect consumer portfolio, the exit of the New York City nonperforming loan and some smaller balanced business loans and $4.5 million release due to the transfer of the Houston multifamily loans to held for sale. These are offset by $2.6 million related to credit quality and macroeconomic sector updates, $1.8 million due to net loan growth, and $5.3 million in recoveries, primarily related to a commercial LatAm loan that was charged off back in 2017. We recorded a provision for credit losses of $12.5 million in the fourth quarter compared to an $8 million provision in the third quarter. The provision included $0.5 million for reserves for contingencies.

Slide 13 is also new and provides a closer look on this topic to illustrate what the incremental charges in the quarter were excluding previously reserved items. In that line, the $20.6 million in charge-offs included $10.3 million from the CRE New York nonperforming loans that we exited in 4Q for which we had recorded specific reserves of $8.5 million in 3Q. Therefore, the impact for this quarter was only $1.8 million in additional provision expense related to this loan. Additionally, we charged off $7 million related to the indirect purchase consumer loans and $3.3 million due to multiple smaller balanced banking loans. The impact of provision due to these incremental charges was $12.1 million this quarter.

We introduced Slide14 this quarter to provide more color regarding criticized loans. Special mentioned loans increased by $16.4 million or 55.8%. The increase is primarily due to five commercial loans totaling $34.8 million downgraded to special mentioned during the quarter, consisting of one commercial Florida ABL loan totaling $18.7 million, three owner occupied loans totaling $13 million and one commercial Texas unsecured loan totaling $3.1 million. The increases were offset by two commercial loans totaling $17 million that were further downgraded to non-accrual during the quarter as mentioned in the previous NPL discussion.

Next, I'll discuss net interest income and net interest margin on Slide 15. Net interest income for the fourth quarter was $81.7 million, up 4% quarter-over-quarter and down 0.6% year-over-year. The quarter-over-quarter increase was primarily attributed to higher average rates on total interest earning assets, primarily loans, increased average loan balances and lower average balance in FHLB advances. The increase in net interest income was partially offset by higher average balances embracing money market deposits and customer CDs as well as lower average balances and deposits with banks. Given there were no market rate increases during the quarter, there is no beta calculation for this period. However, we observed a beta of approximately 47 basis points on a cumulative basis since the beginning of the interest rate up cycle as a result of the combined effect of rate increases and transactional deposits, repricing of time deposits that had not repriced at higher rates as well as higher balances in time deposits at higher market rates.

Moving on to the net interest margin. We added Slide 16 this quarter to show the contribution to NIM from each of its components. As Jerry mentioned, NIM for the fourth quarter was 3.72%, up by 15 basis points quarter-over-quarter. The change in the NIM was primarily driven by the increase in the yield of our loan portfolio, which is now at 7.09%, an increase of 32 basis points compared to the third quarter. Interest income for 4Q23 includes $3.6 million in connection with the loan recovery previously charged off, as I mentioned earlier. Excluding the positive impact of this loan, the NIM would be at 3.56%, which is stable when compared with the 3Q23 NIM at 3.57%. The NIM reflects a higher yield of our earning assets offset by the higher cost of funds. We expect the margin to be stable through the second quarter. More on NIM in my closing remarks.

Moving on to interest rate sensitivity on Slide 17. You can see the asset sensitivity of our balance sheet with 52% of our loans having floating rate structures and 56% repricing within a year. We also continue to execute ALM strategies including hedging interest rate risks as we expect the downward trend in interest rate starting in 2024. As we have said in previous calls, we continue to position our portfolio for a change in rate cycle by incorporating rate floor when originating adjustable loans. We currently have 49% over our adjustable loan portfolio with floor rates. Additionally, you can see here that within the variable-rate loans, 36% are indexed to SOFR. Our net interest income sensitivity profile remained stable compared to the third quarter. We also include the sensitivity of our AFS portfolio to showcase our positioning to benefit from a rate down scenario. As I've done in the past calls during this interest rate cycle, I would like to mention the change, in this case, the improvement in AOCL following expectations for easing monetary policy in 2024. We will continue to actively manage our balance sheet to best position our bank for success in 2024 and beyond.

Continuing to Slide 18. Noninterest income in the fourth quarter was $19.6 million, a decrease of $2.3 million from the third quarter, primarily due to lower mortgage banking income, reduction adjustment of $0.7 million in connection with the enhancement of BOLI during the quarter, lower fees on customer deposits in the fourth quarter in connection with the FIS conversions, lower gains on the early termination of FHLB advances, and lower loan level derivative income due to less new swap contracts during the quarter. Offsetting the decrease in noninterest income were higher cards and trade financing, trade finance servicing fees. We consider $5.7 million of our noninterest income as non-recurring item, a decrease compared to $6.9 million in the third quarter. Core noninterest income was $14 million in the fourth quarter compared to $15 million in the third quarter. Amerant's assets under management in custody totaled $2.3 billion as of the end of the fourth quarter of $197 million or 9.4% from the end of the third quarter. This increase was primarily driven by increased market valuations following the market value we saw in the fourth quarter.

Turning to Slide 19. Fourth quarter noninterest expense was $109.7 million, up $45 million or 70% from the third quarter and up $47 million year-over-year. We consider $43 million of our expenses this quarter as non-routine expense items as previously mentioned. The quarter-over-quarter increase was primarily due to the following. Previously discussed charge in connection to the transfer of the Houston CRE loan portfolio from loans held for investment to loans held for sale. Higher professional fees of fourth quarter expenses included the recurring expenses for FIS for the full quarter, whereas 3Q ‘23 only included expenses for a portion of September. Higher salaries and severance expenses driven by restructuring of business lines and other restructuring activity. Goodwill impairment due to the consolidation of Amerant Mortgage and dissolution plan of Elant Bank & Trust in Cayman, as well as other expenses in connection with the BOLI restructure. The increase in noninterest expense was partially offset by lower occupancy and equipment expenses since there were no expenses associated with fresh closures during the quarter. In terms of our team, we ended the quarter with 682 FTEs, out of which 65 are in Amerant mortgage, lower from the 700 we had in the third quarter following strategic reductions in headcount across multiple units.

Moving on to Slide 20. We reported fourth quarter diluted loss per share of negative $0.51 on net loss of $17.1 million. We recorded an income tax benefit, which impacted our diluted EPS favorably. As we have mentioned earlier, non-interest expense was higher during the fourth quarter, which resulted in the significant net impact of non-routine items on EPS.

I'll now give some color of our outlook for the first quarter 2024 and 2024 overall. So in summary on the next slide, we will say the following regarding financial expectations. We expect annual loan growth of approximately 15%, our projected annual deposit growth will match loan growth. We intend to focus on improving the ratio of noninterest-bearing to total deposits. Having new treasury management platform and new digital account opening tool should help in this regard. Our loan to be profit target will remain at 95%. The net interest margin is expected to be stable compared to the normalized 4Q23 results at the 3.50% to 3.60% level in the first half of 2024 and improve over the second half of the year. We expect higher expenses in the first half of 2024 given investment and continued expansion predicting to achieve 60% efficiency in the second half of 2024 as we grow. We intend to continue executing on prudent capital management balancing between retaining capital for growth and buybacks and dividends to enhance returns.

And with that, I pass it back to Jerry for 2024 overview and closing remarks.

Jerry Plush

Thanks, Sherry. So on our last slide today, I'm going to give some comments on how we see 2024. So starting off, we view this year is very significant as we transition from what has been a multi-year transformation phase over to execution and profitable growth. With the FIS conversion and much of the physical infrastructure changes nearly complete along with the executive leadership team now in place, this allows for our primary focus to be all about execution.

The first two quarters of 2024 will reflect increased investment in business development personnel to drive incremental growth in both the commercial and consumer banks. There are considerable opportunities for solid relationship growth in the markets we serve and we're seeing a lot of interest from quality people wanting to join our team. The first half of 2024 will also reflect the incremental expense post conversion as we decommissioned from previous systems. And now the emphasis shifts from the conversion to accelerating our digital transformation efforts. We have a great team on board driving our efforts and utilization of AI as part of this will be something we'll update everyone on throughout the year. We are focused on improved self efficiencies as well as front and back office efficiencies as our top priorities. And as far as an update on physical distribution, we're finally opening our new locations in Downtown Miami, Fort Lauderdale, and Tampa in the first quarter of 2024, and also our new regional offices in Tampa implantation.

So, now we will shift and talk a little bit about the second half of 2024. We expect to show the growth and profitability that results from the execution of our plan. And in closing, we are reaffirming our commitment to be the bank of choice in the markets we serve. We have been retooling and building for some time to have something very special here and we believe this is our year to show how it all comes together.

So with that, I'll stop and Sherry and I will look to answer any questions you have. Daryl, please open the line for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Michael Rose with Raymond James. Please proceed with your questions.

Michael Rose

Hey, good morning, everyone. Thanks for taking my questions.

Jerry Plush

Good morning.

Michael Rose

Jerry. Good morning. Maybe we could just start with the loan sale in Houston. I think when it was announced, it was a pretty large percentage of what was there and just given what we've seen you do in New York in terms of kind of pulling out of that market, I just wanted to get a sense for what the strategy for Texas is. Is this a market that you're going to look to continue to be in or is the focus kind of be to just focus on core South Florida operations at this point? I would just love some overarching thoughts. Thanks.

Jerry Plush

Yeah. So, Michael, we emphasize that this portfolio of loans were really, sort of -- we'll call it non-core. They were not broad relationship based. We don't have full relationships with the sponsors. The remaining portfolio that we do have associated with Houston is and we believe that there is solid and it makes sense for us in terms of the operations there. I would also make the remark that I covered earlier again that we felt that Houston was in terms of loans versus deposits, not really self-funding and we think this gets us much closer to rightsizing the operations there. Look, we have great opportunities we think in all of the markets we serve. Clearly, we get far more brand recognition right now because of all the steps we've taken in South Florida, but that doesn't mean that we're not looking at opportunities across the entire footprint.

Michael Rose

That's helpful. And then maybe for Sherry, just kind of a modeling question. Certainly a lot of moving parts on the expense side. I appreciate the color in the slides to get down closer to a 60% efficiency ratio by year-end. But can you just help us from a run rate perspective in the first quarter, just given that there was so many moving parts what we should be kind of be using as a base, and just given that you guys have some additional investments, it looks like in the first half of the year. How should we think about at least expenses over the next quarter or two? Thanks.

Sharymar Calderon

Sure. So what we're seeing in terms of forecast for 2024 is that we should be, let's say, either stable or even slightly higher closer to the 68% in the first few quarters of the year. And this has driven, you're going to see some drop off of some technology costs or a re-composition of the expenses and higher investments on the people side, as we work towards growth on later on in the year. So I think using a 67% to 69% should be a good range for expectations in the first half of the year.

Michael Rose

Okay, very helpful. And then maybe just finally for me just, Jerry, stepping back, I mean you guys have done a lot over the past couple of years really since you kind of took the reins. Are we done with the majority of the large moves and, a, could we start to see some cleaner results once we get past the first couple of quarters of the year and I think when I put the pieces together, just given what is shaping up to be your expectations are for a pretty strong balance sheet growth this year, both loans, deposits. It looks like you're going to have a fair amount of positive operating leverage, beginning as we get into the back half of this year and really into 2025. So just wanted to comment where you think you are with those efforts? And then it looks like you should be able to get sufficiency ratio kind of sub 60% driving ROA above 1%, drive pretty good kind of returns that. Not asking for explicit guidance but it does seem like the path forward here, especially once we get into 2025 is pretty powerful from an earnings perspective and just wanted to get some color and thoughts from you? Thanks.

Jerry Plush

Yeah. No. Thank you, Michael. I would respond by saying again we have the right executive leadership in place, we've got the physical distribution the vast majority. Yes, we'll do some additions here and there, but it won't be anywhere near as significant in terms of the amount of different retail facilities and regional hubs I just went over, also having the conversion behind us. I think it's safe to say that in terms of trying to shake out, is there anything else on the non-routine side. We certainly believe that our best days are ahead. It's going to be all about executing our plan. We think we've got the right people. We think we're adding even more quality people and that's all going to drive incremental growth and profitability. So we're excited. I think that it's been quite a journey here and I do think it's important to say that we really do believe our of this transformation phase, we've got to go full steam ahead on our growth and just execute.

Michael Rose

All right. Thanks for all the color. I'll step back.

Jerry Plush

Thank you.

Sharymar Calderon

Thank you, Mike.

Operator

Thank you. Our next questions come from the line of Feddie Strickland with Janney Montgomery Scott. Please proceed with your questions.

Feddie Strickland

Hey, good morning, everybody.

Jerry Plush

Good morning, Feddie.

Sharymar Calderon

Good morning.

Feddie Strickland

Just wanted to step back to the expense discussion again, real quick. Just trying to understand in the second half of the year as we get to that 60% efficiency. Is part of that, I guess our expenses flat from the second quarter or do they come back down just as some of these dual systems turning to single systems? I guess my question is as we go back towards like a $60 million level or do they just stay relatively flat in the back half of the year?

Sharymar Calderon

Yeah, we do expect that in the second half of the year, expenses will stay pretty flat to what we've seen earlier in the year. I think what you're going to see in terms of the improvement on the efficiency ratio will be driven by the growth component.

Feddie Strickland

Got it. So, it will be on the revenue side. That makes sense. And then moving over to the charge-off piece, I think I heard you say that most of that this quarter was driven by the movement in the New York portfolio getting that one NPL out of there. Does that mean we should expect charge-offs to kind of step down a bit from here and primarily driven by the consumer portfolio than any other one-off items that might come up in the next couple of quarters?

Sharymar Calderon

Yeah, from a charge-off perspective, you're right. The drivers of the charge-off this quarter were the New York nonperforming loan. And we also had some charge-offs related to the indirect consumer portfolio. We are not expecting a similar level of charge-offs coming from the New York portfolio in the next quarters.

Jerry Plush

Yeah. And, Feddie, to add to that, that's why I gave those comments around the $217 million that's left on the portfolio is 21 properties, 12 sponsors. It's all performing. We've got a small credit that we've got on our watch list based on payment history. But I would tell you that in terms of the size issue, some of the issues that we've had, we've got it already either in NPA, right, because that's the one big area that we still have, which by the way, just making a comment, we're making a lot of progress there. We did get the permits to be able to open the accessibility on that one, I just think we're in a little better place as it relates to what's going to happen there and being able to get that thing moved hopefully here in 2024.

Feddie Strickland

That's helpful. One last thing, just wanted to make sure I heard the NIM guide correct. I know it's flat in the first half of the year in the 2024 outlook, but I think I heard you say that that was going to step down -- step back down, actually the 3.50% to 3.60% range because of that little recovery piece. Did I write that down correctly?

Sharymar Calderon

Yes, we are expecting to stay within the 3.50% and 3.60% range in the first half of the year.

Jerry Plush

Yeah. Feddie, we think we hit the inflection point, right. I think if you now look at which originally we were thinking wouldn't come until 2024, we obviously with a bunch of different moves we've may got there quicker. And that's actually one of the real positives out of the fourth quarter.

Feddie Strickland

Got it. Well, that makes sense. I like what Michael said. It sounds like definitely have some profitability growth in the future. So, I'll step back. Thanks for taking my questions.

Sharymar Calderon

Thank you.

Jerry Plush

Thanks, Feddie.

Operator

Thank you. Our next questions come from the line of Russell Gunther with Stephens. Please proceed with your questions.

Russell Gunther

Hey, good morning guys.

Sharymar Calderon

Good morning.

Jerry Plush

Good morning, Russell.

Russell Gunther

Just a quick follow-up on the margin discussion. Can you guys share what your interest rate assumptions are that are underlying that guide?

Sharymar Calderon

So from a NIM perspective, what we're expecting at least in the first -- in the first half of the year is for the loan portfolio to stay pretty flat or loan production that's coming on to the portfolio to be in the higher end. And from the expense standpoint, we're seeing that the overall -- we got to the point where pretty much everything has reset to the current rate level. So, we're expecting cost of funds to stay pretty flat. What you're going to see, Russell, is that in the first -- in the first quarter, we have a timing component. We have a timing component related to the reallocation of the funds that come from the multifamily portfolio. So some of those will be placed in liquid assets as we're able to redeploy them into the loan portfolio, which will be able to take us to the higher end of the range that we provided guidance on by the end of the second quarter.

Russell Gunther

Okay. Thank you, Sherry. And then I guess in terms of your expectations for Fed rate cuts or staying stable, just what is baked into the margin guide for '24?

Sharymar Calderon

For the first half of the year, we have rates pretty stable. We are incorporating some rate cuts in the second half of the year. We have modeled from like haircuts up to six haircuts -- six cuts in rates, sorry through the end of the fourth quarter.

Russell Gunther

Okay. So the margin guide includes six Fed rate cuts.

Jerry Plush

No, no. What Sherry has given you, Russell, is we've looked at the sensitivity of none to up to that many. Our projection is that there'll be several in the second half of the year.

Sharymar Calderon

Right. The guidance, Russell, that was shared with through the end of the second quarter for which our assumption is no cuts.

Jerry Plush

Right.

Russell Gunther

Yeah. Okay. Understood. Thank you guys for clarifying that. I guess I would ask then on the beta assumption. So cumulative 47% on the way up. How do you expect that to trend on the way down as you guys are thinking about those three cuts in the back half of the year?

Sharymar Calderon

Right. So if we think about our current portfolio, and we think about the average maturities on customer deposits, and we think about our interest bearing products resetting faster, we should be thinking of with a cut of 25 basis points, we are thinking of a beta closer to 40%.

Russell Gunther

That's great, Sherry. Thank you. And then just switching gears, final question for me guys. Really strong expectation. Any color you could share in terms of loan mix drivers and then I think, Sherry, in your expense comments you mentioned additional cost around hiring folks if that is related to any loan growth expectations as well?

Jerry Plush

Yeah, look I think on both sides of -- as I've said I've referred to it as consumer and corporate and in our consumer it's predominantly additions will continue to make in private banking. We have an already strong team that has done a great job and we believe -- and as I mentioned, we have a lot of people that have a strong interest in working with us I think the reputation of building through even with some of the ups and downs we've had in the financial results, the underlying performance of the company, the growth trajectory, people, all the branding we have been doing, seeing us in the community we had a lot of people that have a strong interest in being part of our team. Same thing is true on the corporate side. We've added some great folks to an already good team, I mean a very solid team for sure and we are getting strong interest there. So it's a combination of, remember last year we built throughout the year and now you're going to layer even more personnel in and basically to put more folks in markets where we think there's great opportunity where we've got strong presence already throughout Miami gate. We know that we can add incrementally to a great team we've got in Broward and to build even further in Palm Beach right. So just here alone in South Florida. And as we've talked about, we put a new regional headquarters that will be opening. We also have the new Tampa our first facility -- branch facility going in there. There's going to be addition on there as well. So we did see -- we're taking advantage of lot of market recognition and a lot of people talking about us to add quality focused in both sides.

Russell Gunther

That's great. Thank you, Jerry. And thank you both for taking my questions.

Sharymar Calderon

Thank you.

Jerry Plush

Yep. Thanks, Russell.

Operator

Thank you. Our next questions come from the line of Will Jones with KBW. Please proceed with your questions.

Will Jones

Hey, great. Good morning, guys.

Jerry Plush

Good morning, Will.

Sharymar Calderon

Good morning.

Will Jones

So I just wanted to stick on the growth discussion for a second. Jerry, the outlook really is a strong, particularly on the deposit side. I know a lot of your peers would really cherish being able to grow deposits at that pace. What do you have to pay on new deposits to attract that kind of growth in this upcoming year?

Jerry Plush

Yeah, I don't know that it’s much to pay on the deposits, it's asking for the business. I think this is a shift -- a cultural shift in our company where we've really emphasized, I've been talking about it from the previous quarters about deposits first is job one. And I just think asking for the business right. We had been very siloed in approach, years ago, and the change culturally in the company, it's coming through in the numbers. I actually think, Sherry made a great observation in your comments that we've almost got an incredible opportunity not almost, we have an incredible opportunity because of the new treasury management platform coupled with a much smoother account opening process on the consumer private bank side where it's only a couple of steps. I'm really excited to see the change I think we can make in noninterest growth where as opposed to it having to be, hey, we're growing because we're out issuing time deposits or high rate money market.

Will Jones

Yes. That makes total sense. And are you seeing any green shoots in an international deposit base. I know you guys have been really excited about maybe trying to see an inflection point and the growth in deposits there. Is any of that guidance factoring growth within International deposit base?

Jerry Plush

It's an area where -- I'll call it the strategy is evolving. We think we've got the right marketing, the right Intel that we're developing and we're going to give you guys as we come into, I'll call it conference season probably more and more from the investor presentations more details on how that's evolving. So I would tell you it's an area where the team is working hard. They are definitely getting new business. We have some areas where we want to sort of, I'll call it fine-tune and focus on. And so that's one where I would say maybe by the mid February later first quarter we'll be able to give even more color about how that's going to play out through 2024.

Will Jones

Okay. That's great. And then last one for me, this is maybe more technical, I think I might have been answering the slides but with the multifamily loan sale, within that $30 million charge you guys took, I am assuming that was mostly, if not all rate related. Was there a credit related piece to the -- they made a charge-off with the loan sale or could you just kind of give us the break, there.

Jerry Plush

Yes. No, well, they were all performing, they were all high quality, there's low loan to values on those, no issues on those properties.

Will Jones

Yeah. Okay. Any other larger chunkier pieces of the portfolio that you may look to do a similar strategy with or was it was just really just kind one-time opportunistic…

Jerry Plush

Yeah, this is definitely a onetime opportunistic evaluating. Again, I think we've we kind of hammer around this a lot -- hammer this home that we want to be a relationship-based organization and while there's others that may not take that same approach as us, that's one of the biggest drivers of why we identified that portfolio in particular as one that made sense for us to exit and to basically replace it with knowing the sponsors and having a much broader relationship with those sponsors.

Will Jones

Okay. Great. Well, thanks. Thanks for the color.

Jerry Plush

Sure.

Sharymar Calderon

Thank you.

Operator

Thank you. Our next questions come from the line of Stephen Scouten with Piper Sandler. Please proceed with your questions.

Stephen Scouten

Hey, good morning everyone. Just firstly, I was curious if you had an update on the consumer balances. I don't think I saw that in the slide deck anymore, the indirect consumer, just kind of curious where that falls and what the pace of run off you think it's for here?

Jerry Plush

Yes, around the indirect consumer all right. Just to clarify, you're talking about [indiscernible]

Stephen Scouten

Yeah. I think it was in slide previously maybe $250 million or something.

Jerry Plush

Yeah. It's about $220 million. And I think as Sherry commented, the expectation is based on current payment rates. It will be off the books over the next, I guess the best way to say it is by the end of '25, maybe a little bit residual in the first quarter of '26.

Stephen Scouten

Okay. And I know there was kind of a question around that book with charge-offs in a sense, but obviously charge-offs have been elevated kind of the last couple of years, what do you think a normalized level of net charge-offs is for you guys in this kind of environment with the book you have today after kind of clearing the decks a bit from here?

Sharymar Calderon

Yeah, if we remove these charge-offs from the indirect consumer and we look at a more normalized charge-off level, we're seeing a close of 30 basis points.

Stephen Scouten

Okay. 30 bps ex indirect consumer and then that'll just kind of be piecemeal over that two years as that book runs off.

Sharymar Calderon

Right.

Jerry Plush

Yeah. Look, I think what's happening Stephen in that portfolio is you remember these are debt consolidation loans. It's a pretty granular portfolio. It's not concentrated in any one state, but I do think it reflects the consumer debt load and the pressure that's on the consumer. And so we're seeing that. I think the one portfolio because of the different vintages is actually starting to show signs of the charge-off levels improving, I guess I should say declining. So we're hopeful that we'll continue to see that.

Stephen Scouten

Yeah. Okay. And then just kind of last question around the NIM. So it sounds like -- so we're not taking a 3.72%. I guess if we take the 3.72% minus the loan recoveries kind of starting from 3.56% and then kind of flattish from there, and then even with, if you could just repeat what you have in there from a Fed cut perspective, but how do we think about the ability to expand NIM with the asset sensitivity there? I would have expected in a down 100 basis points. I think you showed down 3.1%. So kind of wondering how that plays out in a down rate environment that we think we might be moving forward.

Sharymar Calderon

Right. So going back to the first part of the question. When we think about the NIM for the first quarter of 2024, we are expecting to see a slight reduction on average balance sheet size because we're going to use a portion of the proceeds to pay off institutional funds. That should pick up once we continue with the loan pipeline materializing, right, so that's what's going to make us go from the lower to the higher end of the range of the guidance we provided through the end of the second quarter. As we think about the NIM more prospectively and how we're managing the rates or protecting the balance sheet from a downward trend, we can -- there are couple of things we were thinking about. The first one is from the investment portfolio, the purchases we have made and that we're looking forward from an expectation around fixed-rate securities but also looking at the quality of those securities and characteristics that slowed down the level of prepayments in a typical prepayment speed environment that we would have on a downward trend. The second piece is on the loan side, and I think I mentioned something of this in my comment. It's the floor that we are using for variable-rate loan production and also looking into fixed-rate loan production as well. That together with the reset of our liability side, I’ve seen an increase in interest bearing products versus CDs, are positioning our balance sheet in a better spot for a downward trend.

Stephen Scouten

Okay. That's extremely helpful. And just last thing I guess is the core spread you're seeing today. What are you seeing kind of on new loan production versus where new deposits are coming on, I guess, as we think about this maybe 15% loan and deposit growth next year kind of what that core spread looks like?

Sharymar Calderon

I think the spread is pretty similar to what we're seeing in the fourth quarter production. I think we got to a point where the deposit side already maxed the rate level and the loan production is already at the high level as well. So I think we're going to think about projections for the first half, I would see a pretty stable level versus the fourth quarter 2023.

Stephen Scouten

Okay. Thanks for your time guys.

Jerry Plush

Thank you.

Sharymar Calderon

Thank you.

Operator

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr. Jerry Plush for any closing remarks.

Jerry Plush

Yes, thank you everyone for joining our fourth quarter and full year earnings call. We're excited about the foundational progress we made throughout 2023 toward becoming a stronger higher performing bank. As I noted earlier, we're now focused on executing on our strategy to show how it all comes together. Thank you again for your continued support and interest in Amerant and have a great day.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.